World Brands: how to hold on to pricing power?

Immunity to macro conditions 

At World Brands, we strive to achieve long-term, compounded returns by investing in high-quality companies with leading brands, technologies or digital platforms that dominate throughout market cycles. These competitive edges are hard to replicate and frequently give companies the advantage of pricing power – the ability to raise prices ahead of inflation without sacrificing market share. 

How do companies achieve this power, and how do they hold onto it even in times of higher interest rates and weakening consumer demand? We explore these questions in this insight.  
 

Since its inception in 2009, LOIM’s World Brands equity strategy has outperformed the MSCI World by investing globally in high-quality brands that dominate their industries¹. These companies benefit from above-average revenue growth and resilient earnings streams. Most importantly, they compound those earnings, meaning they achieve this throughout boom/bust cycles. 

In our view, such characteristics have become even more vital as the era of cheap and plentiful capital that shaped the past four decades comes to an end. We have now likely embarked on a period of prolonged higher interest rates, bolstering the case for a discerning investment strategy that is focused on high return on capital and the ability to compound those returns regardless of prevailing macro-economic conditions.  

We have divided the companies we favour and our thematic universe into three brand categories: 

• Global brands (high-quality global leaders) 
• Digital brands (fast-growing digital platforms and AI software)
• Upcoming brands (fast-growing challengers and disruptors)

Across these categories, we look for businesses with hard-to-replicate intangible assets, such as recognised brands, leading technologies, licenses or platforms. The best-of-breed companies will possess all of these. They are in a position to pass on costs to customers – and many times to increase prices – based on innovation or scarcity. 
 

Index: MSCI World EUR ND
Source: LOIM, as at 31 December 2023. Past performance is not a guarantee of future results; metrics subject to change. For illustrative purposes only.
 

The economic 'moat'

The key to the strength of a company’s proprietary business model (which gives it advantages like pricing power) is often referred to as its economic `moat’. The metaphor, popularised by Buffett, refers to the inimitable characteristics that let a business consistently protect profits, margins and market share. This, in turn, helps shield the company’s investors from competitive and economic headwinds (e.g., inflationary pressures). 

A widely recognised brand, a unique product, control of distribution, innovation, marketing, patents and equipment and/or software that is difficult to replace – all of these can be characterised as a moat.  

Successful technology brands, for example, are often embedded in digital ecosystems that make it economically unattractive for customers to switch platforms. They benefit from a high barrier to entry, high switching costs, and a loyal customer base that spans geographies, generations and demographics. 

Keys to the success of their products include innovative design backed by strong marketing and a user-friendly interface, as well as a sticky, proprietary ecosystem.  Such businesses can fend off rivals in a fast-changing marketplace with leading technology and advertiser-friendly features (e.g., Apple, Alphabet²). 

A successful brand also continually invests to protect its competitive position (e.g., investments in generative AI). 
 

Creating pent-up demand 

Another way to gain pricing power is through limited production capacity that constrains supply and helps fuel demand. This can help foster a sense of exclusivity around a brand. An important advantage is having close control over product quality and supply chain practices (e.g., Hermes, Richemont, Ferrari²). 

Having more demand than supply can largely insulate a business from economic downturns. Even if sales growth moderates, it still tends to outperform peers. 

Another avenue to pricing power is finding a gap in a crowded market. A business can build strong brand loyalty by catering to an underserved customer base.  The World Brands strategy is invested in several brands that are disrupting and challenging their marketplace (e.g., Lululemon, On Holding²). 
 

Risks to pricing power

Pricing power gives companies a margin of safety to weather boom/bust cycles even as rivals struggle. It helps them stay cash flow rich and pass costs onto customers during inflationary periods. 
 
Of course, pricing power can be lost. How does that happen? A big danger is complacency. Holding on to pricing power requires that a company constantly look for ways to offer more value to the customer. A successful business must continually invest in its brands and processes, to keep abreast of changing consumer tastes and new rivals that can challenge their dominance.  

As active investors, we must also stay vigilant and look for signs of diminishing pricing power or lack of innovation. 
 

Picking brands ahead of trends: 
a transformational moment for tech names

The team always looks out for the next successful disruptor – this is the ‘Upcoming brands’ category within the World Brands portfolio. 

The World Brands team at LOIM believes that artificial intelligence (AI) represents the most transformative technology since the start of the internet in 1995. We are looking at a total addressable market (TAM) of over USD 1 tn in AI spending in the coming years. This would be larger than today’s cloud software market. Generative AI software and applications dramatically expand the TAM for our software brands in the Information Technology and Communication Services sectors.

Businesses that are building a competitive advantage in Gen AI span AI infrastructure (e.g., Nvidia, Advanced Micro Devices, Palo Alto Networks²), hyperscaler brands (e.g., Amazon, Meta²) and platform software brands (e.g., ServiceNow, Salesforce²). 

Recent earnings reports have given clear evidence that such brands are making good headway into this market as their products find an increasing number of ‘use cases’ among their Fortune 500 clients. The means and channels to harness AI are exploding across the enterprise and consumer landscapes, and there are early signs of strong monetisation potential.

In short, we believe that Gen AI is one area where companies will be gaining a hard-to-replicate competitive edge in the coming years. This is a big future avenue for achieving pricing power. 


1  Past performance is not a guarantee of future results.
2   Any reference to a specific company or security does not constitute a recommendation to buy, sell, hold or directly invest in the company or securities. It should not be assumed that the recommendations made in the future will be profitable or will equal the performance of the securities discussed in this document.

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